Is Your Cash Flow Healthy? Here’s How to Find Out (And What To Do If Not)
Keeping your budget balanced and healthy is one of the biggest challenges when it comes to running a business. This is especially true in the beginning, when you’re far more likely to lose money than make it. It’s easy to feel like any figures in the red are a sign for concern, but that’s not really the case. Cash flow health is far more important than profits and losses.
Bookkeepme is proud to help business owners figure out the best financial approach for their company. To that end, we’ve created this cash flow guide. We hope the following will give you the information you need to evaluate cash flow confidently and make the chances necessary to push your business into a more stable tomorrow.
Why Measure Cash Flow?
First, let’s talk about why cash flow is so important for small business owners. Few brand new businesses make money right away - in fact, it’s perfectly normal to go a couple of years before you really make a profit. This makes profit and loss a relatively ineffective way to measure success, since you can be in the red but still moving toward profitability.
Similarly, it’s possible to be making a profit, but still learn plenty from cash flow statements. For example, if you’ve registered as an LLC, but you’re not really getting any ROI's from your registration or annual fees, it may be time to transition to a sole proprietorship. Many business owners assume they need the LLC designation, but it’s often not necessary for businesses that aren’t taking on much legal risk. Sole proprietors don’t pay annual fees, and they simply claim their business profits on their personal tax returns rather than filing those separately. Cash flow statements are the perfect tool for identifying this type of unnecessary spending.
Cash Flow Health Check
So how do you tell if your cash flow is or isn’t healthy? The ways that money flows in and out of your business have a lot to say about how your business is doing overall. The ideal cash flow statement is one that shows that the majority of funds come from sales and services rendered, with minimal - if any - funding from loans or investors. Meanwhile, a healthy cash flow should show that money mostly goes out toward building stability and growth. Finally, although profit is not a clear indicator on its own, you should see a pattern of decreased loss and increased growth over time.
Unhealthy cash flow would look like a business that is funded mostly or entirely on loans and investments, without much in the way of self-funding. Output is generally only used to pay employees and secure inventory, or may go toward services which don’t provide much ROI's. Profits remain low, and the money you get from rendering services isn’t going into paying off loans or building self-sustainability. These are clear signs that your business is in trouble.
What To Do
If your cash flow looks more like the second example, don’t panic. There’s plenty you can do to address your cash flow issues and turn things around. For example, you can invest in services that will help you increase business, such as marketing. You can work with a bookkeeping service to help identify investments that aren’t paying off. Most importantly, you should focus on allocating whatever funds you can toward paying back investors and loans so your business can become self-sufficient.
Cash flow statements are a great way to give yourself a good sense for how your small business is doing. They empower you to recognize patterns in how money flows in and out of your business so you can adapt your approach as needed. Staying flexible and keeping an eye on cash flow puts you in a great position to make the most of your small business!
Need a hand getting your books in order? Contact Bookkeepme today!
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